Texas Instruments (TI) (TXN -0.17%) stock lost about 7.5% of its value in the trading session following its latest earnings report. While revenue exceeded expectations, a muted outlook for the upcoming quarter prompted investors to sell.
That situation may create a predicament for long-term shareholders. Is the lowered outlook a sign of more pain to come, or should investors treat the pullback as an opportunity to add shares?
The state of TI
TI is a semiconductor stock that arguably does not get the attention it deserves from the market. Its analog and embedded chips do not grab the same interest as chips produced by an Nvidia or an Advanced Micro Devices, but they remain a critical part of the industry. Its chips translate analog signals into digital signals. Without that technology, the latest technologies, including artificial intelligence (AI), would not be possible.
As a result, TI produces more than 80,000 products for over 100,000 customers. The majority of its business serves the industrial and automotive sectors, though its chips also appear in products such as enterprise systems, communications equipment, and personal electronics.
TI also stands out in unique ways. During the tenure of former CEO Rich Templeton, TI became a dividend juggernaut, growing the payout at a compound annual rate of 24% between 2004 and 2023.
Under current CEO Haviv Ilan, the increases are more modest, as last year’s increase was 5%. Still, it offers a dividend yield of 2.9%, far above the 1.2% average of the S&P 500. That makes it an excellent choice for income investors when one factors in the 21-year record of annual payout hikes.
Furthermore, unlike most other chip companies today, it handles its own manufacturing, with 15 fabs operating globally. It has also begun to build two additional fabs in Sherman, Texas, and construction is ongoing amid an industry slowdown.
TI’s earnings
Fortunately, the financials show that that slowdown could soon end. In the fourth quarter of 2024, TI reported revenue of just over $4 billion, a pullback of less than 2% from year-ago levels. This beat the company’s outlook in the third quarter, when it said that revenue would be no higher than $4 billion.
Its performance may also point to signs of improvement. In 2024, revenue was just under $16 billion, an 11% pullback compared to 2023. Analog revenue was up 2%, but an 18% drop in embedded revenue weighed on its results.
Moreover, the cost of revenue increased slightly during that time. Hence, the $4.8 billion net income during that time represents a 26% yearly decline.
Nonetheless, management forecasts revenue of $3.9 billion at the midpoint in first-quarter 2025. That level is still below Q1 2023 (when it came in at $4.4 billion), indicating that its recovery is not yet complete. This may explain why its stock rose by only 9% over the past year. Thanks to the recent sell-off, that lags the S&P 500’s returns during the same timeframe.
Additionally, its price-to-earnings (P/E) ratio is at 36, a level near multi-year highs. The earnings multiple averaged 25 over the last five years, and with its tepid financial performance, investors may think twice about paying a premium in today’s business environment.
Stand pat on TI stock
Under current conditions, TI stock looks like a hold. As previously mentioned, TI’s chips help make today’s cutting-edge technology possible. This factor makes TI an extremely safe long-term holding, and the rising dividend makes it an increasingly appealing income stock.
Unfortunately, the chip industry is cyclical, and TI is still struggling to come out of a slowdown. Additionally, this comes at a time when its P/E ratio is near multi-year highs, which seems to bode poorly for the stock.
None of these challenges are likely to derail TI’s long-term growth, and investors should consider the stock if its P/E ratio falls below 25. Still, for now, investors should probably refrain from adding shares.
Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Texas Instruments. The Motley Fool has a disclosure policy.
